USMCA: The New NAFTA is Finally Here

USMCA: The New NAFTA is Finally Here

We are only a few of days removed from Sunday, September the 30th. On that date, it was announced that the United States, Mexico, and Canada had reached a new deal to replace the existing NAFTA agreement. The new deal will be known as the United States, Mexico, and Canada Agreement (USMCA). While it follows many of the guidelines of its predecessor NAFTA it differs in many key points that were especially important to United States President, Donald Trump. It was essentially his campaign promises to better America’s trade deals abroad that brought forth the negotiations in the first place. Now that they have been finalized let’s take a step back and remember how it all began!

A Trump Campaign Promise Coming to Life

At a rally in Grand Rapids Michigan in November of 2016 in what was to be one of his final campaign acts then-candidate Trump had this to say about NAFTA:

“A Trump administration will renegotiate NAFTA and if we don’t get the deal we want, we will terminate NAFTA and get a much better deal for our workers and our companies. 100 percent.”

In earlier statements then-candidate Trump had referred to deal as the “worst deal ever”, and had constantly vowed to pull out of the deal or renegotiate. This caused constant tension with the U.S.’s neighbor countries that led to canceled meetings and awkward handshakes. In August of 2017 representatives from the three countries met in Washington for the first time in an effort to try and re-negotiate the decade-plus long agreement. Trump’s comments were not the only driving force behind the idea of negotiating the deal. The ongoing trade tension regarding the U.S. and China played a major factor in the auto industry part of the deal. As many car components were being brought to Mexico from China and being put into cars that crossed the border under the agreement. Also, Trump had attacked the Canadian dairy industry for their excessive tariffs and the fact that U.S. farmers had virtually no access to Canadian dairy market!

The Men in Charge

The U.S. assembled a negotiations team that included 2 very close Trump confidants. Secretary of Commerce, Wilbur Ross, who is Trump’s personal friend going back to their days in the private sector. The former leader of the White House National Trade Council Peter Navarro. While also including two trade negotiation veterans in Robert Lighthizer and John Melle. Lighthizer has been in negotiations talks with Japan as a U.S. Deputy Trade Representative all the way back in the Reagan Administration. While Melle as the assistant USTR had worked very closely with Mexican representatives for years. Even Secretary Ross had already developed a relationship with Mexican negotiator Ildefonso Guajardo as they had talks over a sugar trade issue months before the renegotiation talks started. The team was incredibly balanced between people who were instrumental in developing the current trade strategy along with President Trump and international trade experts.

They ultimately had the Trump administration’s interests present in the room at all times. Then boldly adding two trade veterans to the mix was a move that proved beneficiary. As the new deal accomplished most of what the Trump Administration had set out to do since the campaign days. The new agreements in the automobile industry and labor laws directly impact the American workforce. On the other hand opening up the Canadian dairy market for farmers is a huge win for the U.S. Especially in the sector that has been hit hard from the trade issues with China.

Mexico: The Auto-Industry and Labor Laws

By far the two biggest issues that the U.S. essentially had with Mexico was the fact that many American and foreign companies were seeking the country out as a spot to build factories in and produce for the U.S. market. Importing goods through the benefits of NAFTA. Mexico became such a hot spot for companies because of its cheap workforce. That allowed companies to cut costs down in employee salaries and overall accommodations that would be way more expensive in the United States.

The new agreement contemplates that for a car to be able to pass to the United States under the USMCA 75% of the components of the car have to be manufactured within North America. Up form the 62.5 % that the old NAFTA deal required. Effectively dealing a huge blow to car manufacturers that made most of their components in China and only assembled in Mexico. Also, 40 to 45% of the workers that make each part of a car have to be making over $15 an hour. This change will take full effect until 2023. Enough time to get many car factories back in the U.S. Mexican workers only earn around 4 dollars an hour. The increase to around $16 an hour will effectively mean that workers would be making more than what a lot of people in management positions in Mexico. This makes it very unlikely that workers in Mexico will be offered such salaries. In turn, the production of these parts will probably move to the U.S. or Canada.

U.S. Farmers in Canada’s Dairy Market

President Trump tweeted a couple of days ago that the new USMCA,

“greatly opens markets to our Farmers and Manufacturers, reduces Trade Barriers to the U.S. and will bring all three Great Nations together in competition with the rest of the world. The USMCA is a historic transaction!”

With the new deal, it is reported that U.S. dairy farmers will have access to around 3.6% of the Canadian market. The rest of which will continue to be held by local producers. The estimates indicate that American dairy products to Canada will increase in around 70 million dollars under this new deal. Overall it’s not an absolutely huge breakthrough that should get everyone over excited. Still, it is an increase over a previous number and has the potential to grow over the course of the years.

USMCA Not Finalized Just Yet

Although all three countries have announced that a deal has been reached the new regulations will not come into place until the agreement has been signed and approved by each country’s legislative branch. President Trump and President Peña Nieto of Mexico are expected to sign the agreement in the next G20 meeting. Both countries are in quite a hurry as Peña Nieto is leaving office in December and wants to get the agreement approved before he leaves. Trump has midterm elections coming up that could potentially complicate things. If the Democrats take back control of the house they may be reluctant to giving him a win in signing off on this new agreement. The fat lady has not yet sung on the USMCA, and we can probably expect a number of new developments before all set in stone!